Livewire buy will start giving returns in a year: OnMobile

Data and value added service provider OnMobile Global expects its latest buy Livewire Mobile to start generating cash within a year, Managing Director and Co-Founder Mouli Raman, told CNBC-TV18 today.

On Wednesday, Morgan Stanley had downgraded the company's stock and halved the target price on claims that OnMobile Global did not have synergies with the latest purchase. OnMobile acquired Livewire Mobile for USD18 million.

"We see great synergies between us and Livewire Mobile. Today we are seeing significant opportunities around the world for ring back tone. We believe that if we invest at this time in the product and the markets, we can be the global leader in ring back tone (RBT) in the next few years," Raman explained.

Livewire acquisition would help OnMobile Global to enter in North America’s RBT market. According to him, North America is the highest music consuming market with very high average revenue per unit. Livewire, already has presence in some of the large operators in North America. "We believe that this is going to help us dominate the RBT around the world," Raman said.

Below is the verbatim transcript of the interview

Q: The genesis of this report from Morgan Stanley was that they believe that you had a nice cash on your book about USD 28 million and some part of that would have gone back to the shareholders instead you had acquired Livewire Mobile for USD 18 million, which may not have too many synergies, what are your comments on that? Do you think this acquisition has synergies for your company and will it be earnings per share (EPS) accretive going forward?

A: We see great synergies between us and Livewire Mobile. Today we are seeing significant opportunities around the world for ring back tone (RBT) and over the last couple of years, we have won some significant deals and we are already starting to show superior results in the market. We believe that if we invest at this time in the product and the markets, we can be the global leader in RBT in the next few years. One of the key that we have today is the North American market for RBT. We are live in all the other continents, but North America which is the highest music consuming market in the world with very high average revenue per unit (ARPU), we do not have RBT there. We have been trying to get in there. Based on our assessment, we believe that we would have taken about two-three years to do organic entry into that market. This is where we got Livewire, who already has presence into some of those large operators. We believe that this is going to help us dominate the RBT around the world.

Q: By when do you think you will be able to harvest from this investment?

A: The way we are looking at it, it is going to take about three and a half years or so for us to recover the money. We are looking at about internal rate of return (IRR) of 18 percent over five years.

Q: You will end up using almost 60-70 percent of your cash on book, this could be an all cash acquisition?

A: It is all cash acquisition.

Q: The stock has suffered a lot, so in terms of shareholder expectation of maybe a special dividend or some kind of money flowing back, does that get pushed back?

A: We considered various factors. We came to the conclusion that this is in the long-term interest of the company. From the shareholder standpoint, we also increased the dividend from 10 percent to 15 percent this year. We have taken this decision balancing various considerations.

Q: You are not going to take extra loans to buy this company?

A: We have partly funded this acquisition through loans while we have cash in the bank. Basically we thought that it is more prudent for us to get funded by loan.

Q: In a scenario like this, the expectation is that the Livewire will only turn profitable maybe in FY15 and in that sense it may not add to your EPS by as long as maybe FY16 or so, don’t you think it is a slightly longer-term in nature the kind of bet that you are taking right now?

A: This year it will not be accretive but next year onwards it will be accretive. So it will start generating cash about four quarters from now and it will be accretive in the next year.

Q: This time your margins could take a little bit of a beating and at least at the net level because you would be paying a higher interest cost?

A: This year there is going to be a slight reduction in our profits. From the next year.